Perform a Condo Stress Test

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During the past year, Miami’s real estate market has been all about distressed sales. As such, when considering investing in a Miami condo, performing a stress test to determine the financial health of the condominium association should be a critical part of your evaluation.

Why?  You need to determine if the condo association has sufficient capital buffers to withstand the impact of an economic environment that is more challenging than expected. It also important to point out that in general the most attractive condo deals are typically located in the most financially strapped buildings.

There is no simple mathematical equation or “health index” that can be applied. However, utilizing the following Condo Stress Test as a base guideline will help you make a more informed decision.

The Condo Stress Test:

Question 1 – What is the ratio of owner occupied units to investment properties?

Guideline – If the number of investment properties and/or second home owners is greater than fifty percent (50%), the higher the risk of further defaults, budget shortfalls, maintenance fee increases, or necessary assessments.

Question 2 – What percentage of unit owners are delinquent on their monthly maintenance fees?

Guideline – If twenty percent (20%) or more of the current owners are behind on their maintenance fees, then you could be in for a special assessment to make up for revenue shortfalls, a dramatic cut in the buildings services, and possible maintenance deferral issues.

Question 3 – How many units are currently distressed, including those in pre-foreclosure, foreclosure or already in bank owned status?

Guideline – If more than ten percent (10%) of the overall units are distressed, be prepared for more pain and potential increases in maintenance fees and/or new assessments. Today’s market is based on distressed pricing, so as each property goes to auction or is sold by a bank, you face the potential for additional value erosion.

Question 4 – When was the most recent 10 year or 40 year engineering inspection completed?

Guideline – If the building recently passed a major inspection, and there are to be NO assessments to cure any issues, then you are in good shape. However, if the building is due for either inspection, be prepared that the association may have to use its reserves or assess the current owners to cover any areas that have to be brought up to new building code.

Question 5 – Does the condo association have any reserves?

Guideline – If the association has no reserves then this can expose you to several potential issues, including, paying the monthly expenses, maintaining adequate insurance coverage,  unforeseen increase in expenses, necessary improvements, revenue shortfalls etc. Associations walk a very fine line between paying their monthly expenses and maintenance fee revenues.

Question 6 – Has the building cut back on any services or is the property in poor condition?

Guideline – As condominium projects lose revenue and expenses remain constant or increase, they may cut back on the building services, such as security or concierge services. As such, when you interview with the condo association ask for detailed information on any recent renovations, deferred maintenance or upcoming assessments.

Question 7 – Ask current owners or renters if they are experiencing any problems or issues residing in the building?

Guideline -When you are getting close to making an offer on a property, visit the building on your own time and talk to current owners and renters. You will find out very quickly what is going on and the major issues, if any, that people are dealing with on a day-to-day basis. Also, when walking the property pay attention to any notices posted in the building or look for a community billboard where all the recent board minutes, budget and pertinent information should be posted.

Question 8 – Has the condo association made any recent changes to the bylaws or rules?

Guideline -In today’s market it is common practice to find an owner collecting rent and NOT paying their monthly maintenance fees. Some condo associations have adopted a new rule that requires tenants to pay their rent to the association, and then the association will pay any overage to the owner.

Remember, there are certain protections under Florida Law that are in place to protect you, the consumer, when purchasing an existing or new construction condominium.  You are entitled to receive a current of the declaration of condominium, articles of incorporation, bylaws and rules of the association, and the most recent year end financial information.

If for any reason you are not comfortable with the condominium rules, bylaws or financial situation, you have the right to void your contract within a certain number of days, which is three (3) days for an existing condominium or fifteen (15) days with new construction condominiums.

Are you looking for a Miami or Miami Beach investment property at a deep discount? Are you looking for a discounted short sale or bank owned property? Ross Milroy of Miami Angel Properties, LLC may be reached at 305-673-5300 or info@miamiangelproperties.com.

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